Cuddling up to China

New Zealand Herald, Auckland

Cuddling up to China

5 April 2008

By Fran O’Sullivan

The "smog and mirrors" surrounding New Zealand’s historic free trade agreement with China is about to lift, along with remnants of the Beijing winter.

On Monday, Prime Minister Helen Clark’s tiny motorcade will drive up to the Great Hall of the People in Tiananmen Square, where she will greet Chinese Premier Wen Jiabao.

The free trade agreement with the emerging superpower is a huge deal for New Zealand. It will cement Clark’s political legacy at a time when her leadership is flailing, and has the potential to underpin NZ’s growth for years to come - bringing $200 million to $400 million per year into the economy for the next 20 years; although Clark knows she will face flak from minor political parties who can’t see past allegations that China is bullying Tibet.

After languishing in the polls, Clark is poised to bask in the international kudos her Government will gain from New Zealand’s success in achieving a "first mover advantage" as the first Western developed nation to secure an FTA with the Asian powerhouse.

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The "symbolic importance" should not be underestimated, says strategist Alan Carroll. The FTA will be a magnet for foreign companies who want to leverage New Zealand’s increased access to the vast China market.

"You’ve got a window others would die for."

The exact contents of the deal have been kept under strict wraps. From what the Weekend Herald has gleaned, it will provide a big stimulus to New Zealand trade as Chinese barriers are lowered to allow a greater influx of Kiwi products. Over time, most of the tariffs that China slaps on our agricultural and manufacturing exports will be reduced to zero.

The two countries will draw closer together as a result of new investment protocols. More of our people will work and live in each other’s country due to working-holiday schemes, student swaps and new rules to make it easier for business people to get entry visas.

There’ll also be a clause that ensures other nations following behind won’t score better terms in sectors critical to NZ’s future.

NZ won’t be flooded either with hordes of unskilled Chinese under-cutting our workers by accepting lower pay and conditions.

Trade Minister Phil Goff, who is the New Zealand signatory, says the FTA’s significance is reflected in the size of the delegation accompanying him and the PM to Beijing - around 190 business people and civic leaders, including NZ’s top exporters like Fonterra’s Henry van der Heyden and Air NZ’s Rob Fyfe.

They haven’t booked out rooms in the best hotels, like the Regent and the Peninsula, simply to act as a Government cheer squad.

"The estimated benefit to New Zealand of a free trade agreement is a growth in exports against baselines of between $225 million and $350 million a year and, in due course, a reduction in tariff payments worth $115 million," says Goff.

While Wen and Clark look on, Goff and his counterpart, Chinese Commerce Minister Chen Deming, will put their signatures to the deal in front of the Kiwi business delegation.

The relationship between China and New Zealand is punctuated with "firsts". How little NZ was first to negotiate a WTO accession agreement with China when it was struggling for market acceptance, how little New Zealand was first to recognise China as a "market economy", and the resultant invitation from China to be the first OECD nation to start bilateral FTA negotiations.

Former commerce minister Bo Xilai says New Zealand’s recognition of China’s market economy was of "critical importance".

"Put it this way, by offering us a very small favour you have got in turn a huge market."

Bo likened the situation to an Olympics event: "All the participants, due to their excellency, need to be admired. But only the first three will be offered medals. And in the opinion of the Chinese people, New Zealand proved to be a gold-medal winner."

The benefits should flow through the economy, with agricultural and manufacturing exports leading the way.

More than 50 per cent of NZ’s total export earnings come from goods - ranging from milk powder to live animals, genetic materials, meat, wool, horticulture, fruit and vegetables, seeds and other plant material, fishing and forestry.

The gains extend to the movement of people, to tourism, education and a new regime to encourage bilateral investment.

A free trade deal with New Zealand in fact poses no economic risk to China. New Zealand is a non-threatening and developed Western nation, with a substantial track record in setting up FTAs.

But while Clark’s visit will be focused on the FTA, she still intends to raise Tibet in her talks with Wen. "There is a possibility that I may be the first Western leader to go there after the events so I think there will be some interest in that."

Clark may be bluffing.

When she took an unusually (for her) robust stance in Parliament on the Chinese crackdown in Tibet, issues suddenly emerged over the correct protocol for the upcoming FTA signing ceremony. In reality Beijing sweated Clark - just a bit.

She will not meet President Hu Jintao this time. She underscores that Wen is her official counterpart.

The word out of Beijing is that a meeting might have been secured if Clark hadn’t needed to hot-tail it back to Wellington for her party’s election year congress next weekend, where she will be feted for securing the FTA.

But relations were stretched to the point where Clark could not publicly confirm she would go to Beijing when the ceremony was little more than a week away.

Foreign Minister Yang Jeichi sent a private letter to Foreign Minister Winston Peters, setting out Beijing’s view that Clark’s Government should not be too hasty in reaching a view on Tibet. NZ’s view was conveyed back through the ambassadors.

Peters came out on China’s side, saying that "people should not rush to judgment" as not enough facts were known over who was to blame for the turmoil and dismissed calls for an Olympic boycott.

Peters won’t release Yang’s letter. But his statement smoothed ruffled feathers.

"The Tibet issue has demonstrated that NZ has been able to pursue a strong, consistent and positive line on human rights with China, using channels available for dialogue on such subjects, even while involved in complex negotiations on trade issues."

National’s support means the FTA is a done deal. But emotions are still running high in Parliament over China’s human rights record.

Peters’ own political party, New Zealand First, may yet oppose the FTA when it gets to the legislative stage. United Future will vote for the legislation, but its leader Peter Dunne wouldn’t join the Beijing delegation out of opposition to China’s Tibetan stance.

Former WTO director-general and NZ Prime Minister Mike Moore congratulates Clark for the achievement but says the small party leaders should just get out of the way and leave it to the adult parties.

Moore says Peters and Dunne don’t deserve to be ministers given their respective stances.

But the political noise will ultimately die down.

What’s important to note is that New Zealand’s first-mover advantage comes at a time when China is about to embark on another economic phase as it moves further toward creating a rules-based market economy, preparing to turn its SOEs into competitive corporate beasts and establish an internal capital market.

The FTA status as a living document means New Zealand firms should be able to tap into new opportunities as they emerge.

Yesterday, China celebrated a rare new public holiday. The Qingming Festival, or tomb-sweeping day, corresponds with the onset of warmer weather - a fitting omen for New Zealand and China.

NZ’S Four 1sts

* 1st to to sign World Trade Organisation accession agreement with China
* 1st to recognize China as market economy
* 1st developed country to open talks with China on bilateral free trade deal
* 1st Western country to sign a free trade deal with China

WHAT CHINA MEANS TO NZ

* No. 1 source of international students (32,000 in 2006)

* 2nd largest source of imports ($5.59 billion 2007)

* 3rd largest trading partner

* 4th largest source of tourists (122,000 year ended Jan, up 15%)

* 5th most profitable export market ($1.59 billion exports 2007)

CHINA BY THE NUMBERS

* 36 times the land area of NZ
* 300 times NZ’s population
* Doubles the size of its economy every 7 years

Sources: BusinessWeek/Institute of Quantitative & Technical Economics of the Chinese Academy of Social Sciences/China Access.

CASE STUDY # 1: COMVITA

Comvita chief executive Brett Hewlett would love to see the 20 per cent tariff his company’s products attract in China removed. But he’s not banking on it. "I think it could take some years for the gradual relief of tariffs. I’m more excited by the preferred status."

Hewlett is talking about what a free trade agreement really does - the significance of the Chinese head of state awarding New Zealand preferred status. "It puts us on the map. It’s a kick-up for New Zealand companies doing business there."

He’s already experienced the benefits - in greater access to regulators, and a louder voice in hearings - as a result of NZ’s free trade negotiations. "I’ve had very clear evidence that does work in our favour."

Comvita, which entered the China market in 2004, now has 160 retail locations in 35 cities including 35 Comvita-branded stores. Its nutraceutical products include "Unique Manuka Factor (UMF)" honey, multi-flora native NZ bush honey, propolis, royal jelly and "Winter Wellness" lozenges and cough elixirs. Sales in China for 2007 were $2 million - 80 per cent up on 2006. In the context of Comvita’s $50 million sales worldwide in 2007, about $12 million of which was in Asia, it’s small. But as with everything about China, potential is huge.

The company, aiming for $100 million in total sales by 2010, is forecasting about $70 million this financial year. Growth is fuelled by exports, which now account for about 80 per cent of Comvita’s sales. Hewlett agrees that tariff reduction in China would have a significant impact. He points out that the 20 per cent tariff occurs at the transfer price to the company’s distributor in China, and that there is a magnifying effect in the margins from distributor to retailer to consumer.

"It probably results in more like a 35 per cent saving through to end consumers. Or an increased 35 per cent margin that everybody can share across the supply chain, if it was reduced to zero."

Comvita is hopeful the free trade agreement will push for the harmonisation of quality and testing standards between the two countries.

"There has been a tradition of applying almost impossible-to-meet standards and thereby having some form of trade barrier," says Hewlett, referring to the very strict microbiological standards set for honey. "We’re able to meet them, but it comes at a cost."

He sees progress towards normalising standards in recent discussions with China’s Ministry of Health. And in the recent visit of a Chinese delegation to get a better understanding of quality standards applied in honey processing plants.

Hewlett expects the agreement will also address the protection of intellectual property, something the company is particularly concerned about in relation to its wound-care products for which it holds a number of patents.

There are concerns, too, that it will only be a matter of time before there are attempts to counterfeit or pass off Comvita products.

"When we find people cheating, we’ve got to pounce on them and act quite assertively," says Hewlett, noting that being able to take that sort of action comes down to having good relations with the local authorities.

"If you don’t have that relationship, they will just ignore you."

CASE STUDY # 2: PERTRONIC

Lower Hutt company Pertronic’s products won’t win many aesthetic awards - except perhaps in the nondescript utilitarian technology category. But they do stop fires. The maker of commercial automatic fire alarm control equipment - the panels found near the entrances of office buildings, hospitals and hotels - entered the China market in 2006. It hasn’t been easy. "Frankly, the whole process of getting approvals in China is major - we really spent the first year in paperwork getting all the i’s dotted and t’s crossed," says managing director David Percy.

But having found his way through the labyrinth of required approvals from the China National Test Centre, sales orders are beginning to arrive at the company’s Shanghai office. He’s cautiously optimistic about the medium term. "If we had sales in China in the $10 million to $20 million bracket, I would consider the exercise to be worthwhile."

Is that possible? "It’s not an unreasonable market expectation."

Pertronic products, which start at about $7000 and, depending on the site, cost up to $20,000, face a 10 per cent tariff in China. Having that phased out under a free trade agreement would provide a helpful competitive edge - especially against multinational equipment manufacturers which also sell into China. But, while he would like the advantage, Percy says the prospect hasn’t influenced the company’s China strategy.

"You might say: ’Who the hell can compete with manufacturing in China?’ But if you are in specialised industries, you can."

Pertronic focuses on design and development and positions at the quality end of the control equipment market.

It combats low Chinese manufacturing labour costs by keeping the labour content of its products to a minimum, largely by employing automated processes in its circuit board assembly.

Percy hopes the agreement will address the harmonisation of testing standards between China and NZ - something that adds a significant cost to his business. As well as going through Chinese testing approvals, Pertronic also has to pay for Chinese inspectors to come here to assess its factory for quality control certification.

Given that the factory already meets internationals standards (ISO 9001), it’s wasteful duplication of processes, as is the fact that the same products sold here have to meet our safety standards. Percy points out that China is not alone in this; he encounters red tape in Australia and other markets. "It would be ideal if we could get product for the Chinese market tested here, rather than in China, but I think pigs will fly before that happens."

So, besides the phasing out of the tariff, what does he think is feasible? "If I was being wildly optimistic, we might see a situation where China delegates to accredited organisation for things like quality control."

CASE STUDY # 3: ZESPRI

Zespri’s latest TV advertising in China features an animated orange afflicted with kiwifruit envy. Seeing a kiwifruit on a billboard, the orange hurries home, pulls on a corset and dons a kiwifruit skin made at its sewing machine, as oranges do.

After admiring its new look in the mirror, the disguised orange jumps into a box of kiwifruit. Sadly its skin splits, as does those of other kiwifruit revealing incognito oranges, bananas and pineapple. It’s a complex message about how kiwifruit has more vitamin C than other fruit.

"Basically, it’s saying to people that most oranges would like to be a kiwifruit," explains Zespri chief executive Tony Nowell helpfully. He credits the campaign with helping sell about $50 million of kiwifruit in China last year.

In the wider picture of $1.2 billion sales worldwide, China accounts for just 4 per cent of Zespri’s market. But volume growth is 50 per cent up on last year and Zespri is under way with small trial plots to test the agronomics and climatology of growing Zespri’s Gold variety of fruit in China.

"Over a 10-year time frame, there is no reason why China might not become between 10 and 15 per cent of our total business," says Nowell.

Zespri faces a 20 per cent tariff on its fruit exported to China and Nowell says the company is certainly looking to the free trade agreement to reduce the tariff, but he expects it won’t happen quickly. His best case scenario is that tariff reduction would be phased in over five years.

There is delicious irony in Zespri’s success in China. The fruit originates there and was brought to New Zealand in 1904 - when it was called the chinese gooseberry - by the principal of Wanganui Girls’ College, Isabel Fraser. If plans proceed to develop a domestic market in China with Zespri’s Gold variety, the fruit will have come full circle - returning to its home soil, albeit with some New Zealand know-how.

What’s also amazing is that even though there is a significant tonnage of kiwifruit grown in China today, the quality of Chinese kiwifruit is poor compared to Zespri’s, which commands a price premium in the market.

"Because of the power of the Zespri brand, we’ve got every Tom, Dick and Harry trying to copy it. We’re having to spend a not inconsiderable amount of money taking action against counterfeiters," says Nowell.

Zespri recently took action against Znishio which, when pronounced in Mandarin, sounds very similar to Zespri.

Znishio also employed the identical typeface and colour as Zespri in its marketing and packaging.

Zespri got authorities in Shanghai to raid the company and confiscate the product and marketing material. The evidence was used in a successful court action against Znishio which was required to make changes to its brand.

Nowell says having intellectual property matters addressed in the free trade agreement will help in dealing with future transgressions. It will also be important in protecting Zespri’s "16a" Gold cultivar, for which Zespri has plant variety rights which can be verified through DNA tests.

Nowell says the free trade agreement will pave the way for getting the right Chinese government assistance to proceed with its licensed Zespri Gold cultivation projects.

Because of China’s size and its multiple levels of bureaucracy - from Beijing to rural to provincial and city levels - Nowell says creating a successful business venture there is a specialised art form.

"Under a free trade arrangement some of those potential barriers can be removed or smoothed."

- Chris Barton

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